November 06, 2018
Preparing for a no-deal Brexit between friends
We are hearing conflicting reports on whether Theresa May will force her cabinet to accept a compromise over the Irish backstop. The Times is reporting that it would involve an independent arbitration panel, but we fail to see how this can constitute a compromise if the UK then later makes a stand about sovereignty. The truth is there are simply no newsworthy Brexit developments. The reason is that, as of now, there is still no majority for a deal.
So let us focus instead on smaller pieces of the puzzle that might become relevant later.
One of those was a small item in the Financial Times from the Hauts-de-France region in Northern France, whose president is demanding a constructive attitude by the EU in the case of a no-deal Brexit. Expect to hear more of this as we approach the Brexit deadline. If the EU plays it tough to the bitter end, not only Hauts-de-France will be clobbered along with the UK.
The EU could in theory turn a no-deal exit into a de-facto blockade of the UK. But a far more likely scenario would be a no-deal Brexit accompanied by a multitude of mini-deals to keep goods and people flowing for a short transitional period (not to be confused with the 21-month transitional period now under discussion in the Brexit negotiations). The simple reason is that this would be in the best interest of the regions of northern France, Belgium, the Netherlands and parts of Germany, all of which are very keen to keep the disturbance to their economies to a minimum.
The FT has interviewed the president of Hauts-de-France, who wants a no-deal transition until the French and UK governments have a border infrastructure in place to guarantee orderly flows. He has calculated that an extra clearance time of just two minutes per truck would produce vast queues on both sides of the channel.
"The trucks, companies and factories that will be blocked will be those of the north of France, the whole of France and Germany."
The article also notes a comment by David Lidington, Ms May’s de facto deputy, who predicted that the Dover-Calais freight route would be reduced to 12-25% (that is, down by 75-88%) of its normal capacity for up to six months in case of a no-deal Brexit. We note that these capacity cuts apply to both sides - and affect the EU countries closest to the UK disproportionately. Do we think that Emmanuel Macron and Angela Merkel - or whoever succeeds her - will sit back and accept a wholly avoidable economic shock to the disadvantage to their own economies? Of course not.
We have been arguing for some time that the Brexit negotiations would ultimately turn out to be far more even-keeled than one might have thought early on in the talks. This is now becoming increasingly evident. As we draw towards the deadline, many people on both sides of the channel are beginning to realise what a no-deal Brexit would mean for them, and what kind of preparations are necessary. Philip Hammond reiterated yesterday that the UK would pay its exit bill, or parts of it, even in case of a no-deal. This is a sign of the willingness to agree if needed a no-deal type of deal.
The chances of a no-deal Brexit have been substantial throughout the Brexit negotiations, but they were always unquantifiable. Unless there is a breakthrough in the talks in the next few days, we would expect both sides to step up their no-deal preparations dramatically - so much so that the no-deal scenario itself will lose most or much of its ability to scare. Of all the possible outcomes, an amicable and consensual no-deal is not the worst by far. Just think of the civil unrest that could accompany a second referendum, or of a nasty version of no-deal that would lead to the loss of lives because security co-operation ceases overnight, or because vital medical supplies are held up at the border. Unthinkable is the word for that.